Understanding the principal residence exemption

In Canada, when you sell your home for more than you paid for it, that increase in value is technically a capital gain. But in most cases, you won’t pay any tax on that profit because of the principal residence exemption (PRE). This powerful rule allows individuals and families to sell their home tax-free, provided it meets certain ownership and use conditions.

Understanding how the exemption works is essential for anyone who owns or plans to sell a home, cottage, or other personal-use property. It also matters when you own multiple properties or have used part of your home for rental or business purposes.

What Does the Principal Residence Exemption Do?

The principal residence exemption allows you to fully or partially eliminate capital gains tax when you sell a property that qualifies as your principal residence. If the property was your principal residence for every year you owned it, the entire gain is exempt from tax.

The exemption applies to:

Houses, condos, or townhomes
Cottages or cabins
Mobile homes, trailers, or even boats (if used as a residence)
The land around the home, up to a maximum of ½ hectare (1.24 acres) unless more is needed for normal use and enjoyment

Important: Starting in 2016, the CRA requires all home sales to be reported on your tax return, even if the entire gain is exempt. Failing to report can result in penalties or loss of the exemption.

Who Can Claim the Exemption?

To claim the exemption, the property must meet all of the following conditions during the years you owned it:

You or a family member ordinarily inhabited the property at some point during the year (it doesn’t have to be year-round)
You or your spouse or common-law partner owned the property
The property was designated as your principal residence for that year
You report the sale on your tax return in the year of sale using Schedule 3 and Form T2091

Only one property per family unit (spouses and minor children) can be designated per year. This means you must choose which property gets the exemption if you own more than one at the same time.

How Is the Exemption Calculated?

If the property was your principal residence for the entire period you owned it, the entire gain is exempt. But if you rented it out, used it as a vacation property for some years, or owned another residence during part of the time, you may only get a partial exemption.

The formula for the exemption is:

(Number of years designated as principal residence + 1) ÷ Total years owned × Capital gain

The extra year in the formula is a bonus year allowed to accommodate a transition period when selling one home and buying another in the same year.

Tip: Even if you owned a property for just a short time, you can still designate it as your principal residence for that year—provided you lived in it. This flexibility can be useful for tax planning when moving or downsizing.

What Happens If You Own Multiple Properties?

Families who own more than one home—such as a cottage or investment condo—can only apply the principal residence exemption to one property per year. In this case, it may be more beneficial to designate the property with the largest capital gain per year of ownership as the principal residence.

To make the most of the exemption:

Evaluate the potential capital gains on each property
Consider how many years each property was used personally
Factor in market appreciation and likely sale timelines
Use professional advice when selling to ensure proper reporting and optimal designation